ALEXANDRIA, VA (March 2, 1999) -- Imagine a silent country road; warm weather; a giant tree bending its branches over the dusty road. You sit at the trunk of the tree in the shade. A Fool cap covers your eyes. You rest. The day is still. A cricket chirps.

Sudden as the wind, a car zips down the road, spitting up dust, then just as quickly it disappears. The air settles and is still again. You haven't moved. A cricket chirps.

The speeding car could represent many things: the Rule Breaker Port over its four-and-a-half year history, or The Motley Fool itself over its equally brief history; or, it could represent the life of a day-trader, speeding by unnoticed. Or, it might serve to represent this daily column: usually quick, but hopefully getting you somewhere in the end. Educating. Amusing. Informing.

(And if you're new to the Rule Breaker Portfolio, please read the portfolio's five Investing Principles listed to the right of this text, beginning with # 1.)

Zoom. Off we go!

"What fire is in mine ears? Can this be true?"

Yet another Rule Breaker stock announced a 2-for-1 stock split, and again the news apparently made the stock move higher. Our December purchase, @Home(Nasdaq: ATHM), announced a "two-fer" split that will take place following the necessary shareholder meeting for approval. That meeting should take place within the next three months.

Yes, three months.

If this split announcement isn't somewhat premature, hey -- then neither was Michael Jordan's first retirement. So why would @Home announce the split several months before it's likely to occur? Perhaps to boost the stock price?

Bingo.

Don't ya think?

Although I agree with David Gardner's recent column on splits (that they're a non-event and shouldn't matter to investors), studies show that splitting stocks have a tendency to outperform the stock market in the period immediately before and after the split. There are many hypothetical reasons why this occurs.

First, a split often is a bullish indicator from management, as David reminded. (When it isn't, it's often the dangerous opposite: an attempt by insincere management to increase the share price.) Second, a majority of investors do worship stock splits -- be they right or wrong in doing so -- and as long as they do, splitting stocks will likely continue to outperform the indices in the near term.

Investors flock to buy stocks that are splitting because they're conditioned to believe that a split means the shares will rise. And as long as the majority believes this is true, the majority will make it actually happen. It becomes a self-fulfilling prophecy.

The popularity of momentum investors is also playing a role in the bullishness surrounding stock splits. Not only do momentum investors buy splitting stocks for the reasons just given, but a split can create enough momentum to push a stock into new high territories. That event attracts the attention of more momentum investors, because most of them buy stocks when they hit new highs on the argument that they'll continue hitting new highs. Let's use Starbucks (Nasdaq: SBUX) as an example. The stock has been strong since management announced a 2-for-1 split and (afterwards) announced that same-store sales rose 6% in the recent month. (That's a healthy number.)

Before the split was announced, Starbucks traded at around $49 per share. Its 52-week high is $59.93, so it was trading 21% below its high -- a substantial amount. The stock closed today at $54.75, now about 10% below its high. It could soon turn up on the radar screens of momentum investors. (And before we criticize them: the stock's relative strength could improve enough that we'd consider the stock in this example, too, because relative strength is one of our criteria.)

Now, if Starbucks were to split 2-for-1 today (it doesn't) to a price of $27.37, it would be just a few dollars below its all-time high of $29.96 (post-split). Momentum investors would be ready to pull the trigger and buy as soon as it appeared likely to make a new high. If it did achieve a new high, it would jump above $30 and probably keep making new highs for a day or two, under the "right" circumstances.

If all of this sounds incredibly unFoolish, it's because it is. However, it's how momentum investors trade, and studies show active traders like these account for as much as 20% of the Nasdaq market's volatility, so I want to explain it. I believe that a split can indeed bring about a chain reaction that results in outperformance in the near-term, even if all of it is superficial. First, the split is viewed as bullish so investors begin to buy; second, other people superficially expect the stock to rise before and after the split, so they buy, too; finally, momentum investors wait to see a new high about to break, and then they buy, too -- if they haven't already for reasons one and two.

Bad news can throw this waterfall process into a landslide, of course, but in many instances this is how news of a stock split can help create, if only temporarily, extra shareholder value. And we all know: Management is trying to create shareholder value. Companies realize that splits are seen as bullish, so management can use splits to help create value however possible (what is there to lose?). Did Starbucks really need to split its stock at around $50? They didn't say they needed to do so for options granting purposes. It was a split for its own sake. Hey, if it seems to help create shareholder value -- even near term -- will anyone mind? Not at all.

None of this has anything to do with the strategy of a long-term investor or with successful and Foolish investing, but it stands to explain why stock splits often propel already successful stocks to new levels in the near term.

Before moving on: in the interest of creating upheaval among the Buffett purists, I propose that Warren Buffett could create shareholder value by splitting his $2,400 "B" shares of Berkshire Hathaway(NYSE: BRK.B) by 30-to-1, down to $80 a share. How many investors -- again, be they right or wrong -- would pile into the stock at this "lower" price? Plus, couldn't the increased demand actually increase shareholder value for the longer-term, too, if the new demand came from new long-term investors who bought and held shares?

Most readers will likely disagree with the above paragraph, but we won't know until we can test it. (Mr. Buffett will be interviewed by Ted Koppel tonight on ABC's Nightline. Be sure to check it out. Here's a preview.)

Back to @Home.

The company was also rated a "buy" from a new analyst, while management announced (near the end of the day) that it'll roll out its high-speed TV Internet access service in the second half of this year. We already knew that, but we didn't know access should cost just about $15 a month. @Home aims to have 1 million cable subscribers -- up from a recent 330,000 -- before the calendar turns 2000.

"Zounds, hold your peace!"

Amazon(Nasdaq: AMZN) and America Online(NYSE: AOL) took the Rule Breaker Port down a notch today, down over 2%, in fact. Our 8% gains in @Home and eBay(Nasdaq: EBAY) couldn't help. Volatility: it's all over the place.

Expect it to continue. Noisy, loud volatility.

But what's next for eBay's business? Countless things.

Its community of nearly 3 million buyers and sellers stands to be leveraged. As an eBay user, one area for improvement is in payment options. Usually payments are made to a seller via snail mail (check, money order, etc). You could set up electronic payment with the seller, but what eBay needs to do is provide its own banking, more or less, to buyers and sellers -- make the payment process immediate and easy, as soon as an auction closes. eBay could partner with a bank or, depending on its intentions, set one up itself. Sell eBay dollars or credits, or even provide normal banking services. Any number of options exist -- all providing a revenue stream off the top. We're all exchanging money on eBay. The company should make it easy and profit from it, too.

Next: Bartering. How long before eBay provides a strict bartering area? (Maybe NEVER, but imagine it.) Instead of trying to sell something, anyone interested enters their items up for barter in a bartering area; full descriptions are given. Enter approximately what you'll trade for what. ("My Washington, DC, apartment for your Paris studio for one week.") Once the site has critical mass, the computer should be able to match approximate barter partners. ("I'll trade my 94 Honda for a 12 foot sailfish boat.") Makes you think, no? And eBay would get a small fee for matching transactions.

Correction: Monday's Rule Breaker column showed Amgen's (Nasdaq: AMGN) forward P/E as 17, but earning estimates didn't take into account the stock split that occurred yesterday. The forward P/E for the company is actually 35.4, and the EPS estimate is $1.86 per share. (Yes, we thought that 17 P/E looked low for a stock in this portfolio.)

To discuss Rule Breaking, visit your Rule Breaker message board. It's there to help investors who want to learn from this portfolio.

Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.